What Is a Dynasty Trust?
A dynasty trust is an irrevocable trust designed to benefit multiple generations of beneficiaries, thus protecting transferred assets, creating a legacy for your client and providing for professional management if desired. By establishing a dynasty trust and funding it with life insurance, your client can leverage the amount of wealth transferred to heirs.
Typically, life insurance premiums are relatively small compared to the amount of death benefit proceeds. Therefore, allocating the generation-skipping transfer (GST) tax exemption to assets transferred into the dynasty trust for payment of life insurance premiums can be an efficient use of your client’s GST tax exemption. This exemption is allocated up-front to each premium gift made to the trust, not to the policy’s future cash value accumulation or death benefit proceeds, thus leveraging a smaller gift into a significantly larger legacy.
As long as the life insurance remains in force, policy cash values grow on a tax-deferred basis. Life insurance death benefits will be paid to the dynasty trust — free of income tax, estate tax and GST tax. Not all of these benefits are available when the dynasty trust invests in traditional investments, such as publicly traded stock.
Potential Benefits
• Create a legacy for future generations.
• Pass assets to your client’s heirs free of estate taxes and GST taxes.
• Leverage the GST tax exemption using life insurance to create a larger legacy.
• Provide for the professional management of trust assets.
• Control the timing and circumstances when transfers are made.
Planning Considerations
• The duration of a dynasty trust may be limited in some states by the “rule against perpetuities.”
• The desired life insurance policy premium may be higher than the client’s available annual gift tax exclusion, lifetime gift tax exemption and generation-skipping transfer tax exemption.
• Transfers to a dynasty trust are irrevocable and the client may not possess any incidents of ownership in the life insurance policy owned by the dynasty trust.
• Life insurance qualification generally requires medical and financial underwriting.
• Cost of creation and maintenance of dynasty trust.
We're here to help! Reach out to our office to discuss generational planning.